Research by the TUC and the High Pay Centre shows the extent to which returns to shareholders, in the forms of dividend payments and share buybacks, are dramatically outpacing wages across the wider economy.
Our analysis examined dividend payments and share buybacks over the last five years, finding an increase of 56% between 2014 and 2018. This resulted from a 45% increase in dividends, while share buybacks more than doubled. Nominal pay for the median worker increased by just 8% over the same timeframe.
If wage increases had kept pace with shareholder returns, the typical worker would now be over £9,500 better off.
The total returns to shareholders over the period amounted to £442 billion, from net profits of £551 billion. This is the equivalent of giving shareholders around £1.7bn a week every week from 2014 through to the end of 2018.
Payments to shareholders primarily benefit a wealthy minority. UK taxpayers earning over £150,000 (barely 1% of the total) captured around 22% of all direct income from UK dividends. Dividend income accruing via pension savings also disproportionately benefits those at the top – 46% of pension wealth is owned by the wealthiest 10% of households.
In 27% of cases, returns to shareholders were higher than the company’s net profit, including 7% of cases where dividends and/or buybacks were paid despite the company making a loss. In 2015 and 2016, total returns to shareholders came to more than total net profits for the FTSE 100 as a whole.
Throughout the period, profits varied significantly more than returns, ranging from a low of £53 billion in 2015 to a high of £150 billion in 2017, a variation of £97 billion, with a fall between 2014 and 2015 and a sharp rise in 2017. Returns to shareholders had less than half as much variation, ranging from £74bn in 2015 to £122 billion in 2018.
This highlights the immense pressure that boards are under to enrich their investors regardless of whether they can afford it, or if it’s a sensible use of their resources. If they fail to deliver generous returns, the share price will fall with the management facing public criticism, potentially putting their jobs at risk and the company vulnerable to takeover.
The situation is exacerbated by management incentives. When the High Pay Centre last looked at this issue, 74% of FTSE 100 companies tied CEO pay to ‘total shareholder return’ meaning that their multi-million pound bonuses and incentive payments are contingent on them ensuring an ever increasing (or ‘progressive’) dividend and a rising share price, manipulated by buybacks if necessary – even if this is not in the long-term interest of the company and the wider UK economy. The economist Andrew Smithers argues persuasively that the pressure to deliver returns for shareholders means companies are doing so by diverting resources from productive investment. Ultimately this will reduce the productivity of UK companies and the country’s economic growth.
The consistency of shareholder returns also totally undermines the argument that shareholders are exposed to the greatest risk of all business stakeholders, as it suggests that they can expect consistent returns, regardless of profitability. The idea that shareholders are the greatest risk takers, is the basis for the UK’s entire corporate governance system, so this is a significant finding.
Shareholders are considered to have most at stake from the success or otherwise of the company, and therefore it is they who determine board appointments, and approve the company’s financial position and management practices.
The logic of this is flawed anyway, given that shareholders can spread their investments over multiple companies in a way that workers cannot spread their labour. Therefore, workers are surely most reliant on the company being run in a long-term sustainable way. When we see how the doctrine of shareholder primacy has driven returns to shareholders to a potentially unsustainable level, mainly benefitting wealthy investors to the detriment of workers and the wider economy, the case for a different approach becomes even stronger.
Such an approach should involve stronger trade union rights, worker representation on company boards and a rewritten and properly enforced definition of directors’ legal duties, making clear that they have an equal balance of responsibility to the company’s workers, wider society and other stakeholders, along with its shareholders.
Luke Hildyard is Director of the High Pay Centre